School Finance: California School District Parcel Taxes (Qualified Special Taxes) - updated

April.02.2010

As State education funding becomes increasingly vulnerable in Sacramento’s difficult and often dysfunctional annual budget process, more and more school districts statewide are asking us about the rules and requirements for putting a Parcel Tax on the local ballot.

Local Parcel Taxes provide perhaps the only way to provide secure, enhanced funding for school programs, teacher salaries, books, materials and supplies, computers and other equipment, and for vulnerable arts, music and sports programs. Parcel Taxes can also improve a district’s bond rating. This Bulletin addresses some of the most important questions we are hearing.

What is a Parcel Tax?

“Parcel Tax” is the common term for a school district “qualified special tax”. Cities, counties and other districts can also adopt special taxes.

School bonds require a 55% vote; What about Parcel Taxes?

A 2/3 vote is currently required for any special tax permitted by the State Constitution. However, a Statewide initiative petition to reduce the vote to 55% for school and community college district Parcel Taxes is currently circulating. The Local Control of Local Classrooms Funding Act would impose accountability requirements, much like Proposition 39 did for bonds. 

What can Parcel Taxes be used for?

Virtually anything. The law does not specifically limit how the tax proceeds may be spent, but the school board can impose any limits it wants to in the ballot measure. For example, one district we work with has a special tax for educational program enhancement, and a second tax just for maintaining bond-financed buildings. Ballot measures typically focus on “programs,” but if worded appropriately, the funds can be spent on teacher salaries, materials, equipment—any activities or items general fund moneys may be spent on.

When can we conduct an election to approve a Parcel Tax for the District?

Parcel Tax elections can be conducted either as traditional polling place elections or as all-mailed ballot elections on established election dates for each type. A political consultant usually is asked to advise on what date and method may be most beneficial to the district’s efforts.

Polling Place Elections: “Established election dates” are in June and November of each year, in April of even-numbered years, in March of odd-numbered years, and in February of each presidential election year.

All-Mailed Ballot Elections: All-mailed ballot elections can occur on special established mailed ballot election dates in early May and late August of each year and in early March of even-numbered years. Many counties also permit all-mailed ballot elections to be conducted on nearly any Tuesday on which another election is not scheduled.

How long does it take to call an election?

At least 90 days, for the entire legal process. For example, an election held on November 2, 2010 (the statewide election date) would have to be called no later than August 4, 2010. However more time should be allowed for proper planning, surveys, if desired, and to allow concerned citizens to organize into an effective campaign committee. 

What is the legal rate of tax? Are there alternative ways of specifying the rate?

There is no maximum rate of tax. Parcel Taxes are typically levied as a flat rate per parcel—hence, the name.  But the popular name is not a limitation. Some districts collect a fixed amount per square foot of taxable land or building improvements, and many include an annual inflation adjustment.

The tax must be uniform as applied to all real property or to all taxpayers. The tax cannot be related to a taxpayer’s use of the schools. And the tax rate cannot be expressed in terms of the value of the property (an “ad valorem tax”).

Many school districts have won voter approval of Parcel Taxes that impose different rates of tax on different classes of property, typically a higher rate on businesses.  As of this writing, a lawsuit is still pending on such a measure passed by the Alameda City Unified School District in 2008.  This lawsuit might provide the first court guidance on whether the statute permits a differential tax formula.  In the meantime, we caution our clients that they may face legal challenges on any formula not clearly within the statute.

Who must pay the tax? Can certain properties or certain taxpayers be included or exempted?

All real property or all taxpayers must be taxed. For school districts, the law expressly permits only two exceptions: taxpayers aged 65 or older, and recipients of SSI disability benefits, regardless of age, may be exempted by the terms of the measure. Exemptions or reduced rates granted to any other group of taxpayers or any classification of property, as many school districts have adopted, might violate the law’s uniformity requirement. Some school districts adopt administrative procedures to grant special relief in cases where the tax is deemed unfair. But even these exceptions are not clearly permitted by statute.

In addition, unlike for certain school bonds, there is no authority to create special zones within the school district to exempt specific geographical areas, neighborhoods or developments.

Practice Tip: We advise our clients to adopt a separate resolution for any non-essential provisions, such as how and when senior citizens must apply for their exemption.  hen, if the board needs to, it can amend those rules later without violating its “contract with the voters”.

How often must our Parcel Tax be renewed?

There is no maximum term. Traditionally, school district Parcel Taxes were approved for four years. However, there is no limit in the law, and Parcel Taxes lasting 5, 7, or more years are increasingly common. A number of school districts have adopted permanent Parcel Taxes. The longer the term, the more inflation can be expected to erode the spending value of the tax over time, leading many districts to include an inflation escalator in the tax formula. Another strategy is to build upon a fixed permanent Parcel Tax base with incremental increases, as needed. A 2/3 vote would be needed for each new addition. A number of school districts have sought—and obtained—short term supplemental Parcel Taxes expressly to deal with the current State education funding crisis.

Do we need “Gann Limit”? How do we get it? What is it?

We don’t believe you need it. The “Gann Limit” on government appropriations is too complex to discuss here. Suffice it to say that school districts are not subject to the Gann Limit in the same way as other local agencies, and can continue spending Parcel Tax proceeds without repeated elections. Some districts prefer to obtain periodic voter affirmation of their Parcel Tax using this simple-majority vote procedure.

Can anything in the future cause us to lose our Parcel Tax revenue?

Possibly. Proposition 218, adopted in 1996, subjects nearly all taxes to repeal by initiative. Unless the Parcel Tax is pledged to repay bonds or other contractual obligations, a voter petition drive could subject an existing tax to another vote. And repeal would only take a simple majority vote.

In addition, considering ongoing State budget difficulties, there is always a risk that the legislature could cut State funding to districts that have demonstrated an ability and willingness to pass local Parcel Tax measures for educational programs.

Have more questions? Want further information?

We have assisted many of our school district clients in counties throughout the State with Parcel Tax matters.

For assistance with Parcel Taxes and bond measures, please contact John Hartenstein, Chair of Orrick’s school finance practice group, at telephone: (415) 773-5555, email: [email protected].